Question 1

Which of the following best describes the law of diminishing marginal utility?

Accepted Answer

As a consumer consumes more units of a good, the marginal utility from each additional unit decreases.

Question 2

Suppose a consumer spends all their income on two goods, X and Y. The price of X is $4, the price of Y is $2, the marginal utility of X is 12, and the marginal utility of Y is 6. Is the consumer maximizing utility, and what should they do?

Accepted Answer

No, the consumer should buy more of Y and less of X.

Question 3

Which equation represents the utility-maximizing condition for two goods, X and Y?

Accepted Answer

$\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$

Question 4

If the price of a normal good decreases, what are the expected effects on quantity demanded due to the income and substitution effects?

Accepted Answer

Both the income and substitution effects increase quantity demanded.

Question 5

A consumer is willing to pay $18 for the first pizza, $16 for the second, $13 for the third, $9 for the fourth, and $4 for the fifth. If the market price is $10, how many pizzas will the consumer buy and what is the total consumer surplus?

Accepted Answer

3 pizzas; consumer surplus is $17

Question 6

Which of the following statements about consumer surplus is correct?

Accepted Answer

Consumer surplus is the difference between what a consumer is willing to pay for a good and what they actually pay.

Question 7

If a consumer’s marginal utility per dollar spent on juice is greater than that for burritos, what should the consumer do to maximize total utility?

Accepted Answer

Buy more juice and less burritos.

Question 8

Which of the following best explains the paradox of value (water-diamond paradox)?

Accepted Answer

Water has a high total value but a low marginal value, while diamonds have a low total value but a high marginal value.

Question 9

If the price of good X rises, what happens to the consumer’s utility-maximizing condition?

Accepted Answer

$\frac{MU_X}{MU_Y}$ falls below $\frac{P_X}{P_Y}$, so the consumer should buy less X.

Question 10

Which of the following is NOT an assumption required for comparing total and marginal utility?

Accepted Answer

Individuals have unlimited income.

Question 11

Suppose the price of a good falls and the good is inferior. What can be said about the income and substitution effects?

Accepted Answer

The substitution effect increases quantity demanded, but the income effect decreases it.

Question 12

Which of the following best describes the substitution effect?

Accepted Answer

It is the change in quantity demanded due to a change in the good’s relative price.

Question 13

A consumer faces the following marginal utilities and prices: $MU_X = 8$, $P_X = 2$, $MU_Y = 10$, $P_Y = 5$. Is the consumer maximizing utility?

Accepted Answer

No, the consumer should buy more X and less Y.

Question 14

Which of the following is true about conspicuous consumption goods?

Accepted Answer

They may have 'snob appeal', but the market demand curve is still likely downward sloping.

Question 15

If a consumer’s marginal utility from the last dollar spent on shoes is less than that from 'everything else', what should the consumer do?

Accepted Answer

Buy less shoes and more of everything else.

Question 16

Which of the following best explains why the market demand curve is downward sloping for a normal good?

Accepted Answer

Because both the income and substitution effects increase quantity demanded when price falls.

Question 17

If the marginal utility of the last dollar spent on good X is less than that on good Y, what does this imply?

Accepted Answer

The consumer should buy more Y and less X.

Question 18

Which of the following is the correct formula for consumer surplus for a single unit?

Accepted Answer

Consumer surplus = Willingness to pay $-$ Price paid

Question 19

A consumer’s willingness to pay for the first three units of a good is $10, $8, and $5, respectively. If the market price is $6, what is the total consumer surplus for buying two units?

Accepted Answer

$6

Question 20

Which of the following statements about total utility and marginal utility is correct?

Accepted Answer

Total utility is the sum of all marginal utilities from each unit consumed.

Chapter 6 - Consumer Behaviour: Marginal Utility, Income and Substitution Effects, and Consumer Surplus

Study Guide - Practice Questions

Study Guide - Flashcards